Bringing in a contractor rather than recruiting another UK employee may seem attractive on paper. But beware: your contractor could be deemed an employee after all, triggering an unwelcome tax bill.
There are good reasons why technology and media companies make widespread use of contractors. A genuine contractor, whether acting as a self-employed individual or supplying services through a limited company, does not need to be brought onto the payroll, thus saving the firm PAYE and National Insurance Contribution (NIC) costs. The contactor simply issues invoices for their services, payable on the usual business terms.
Another potential attraction is that an individual contractor does not benefit from any of the rights associated with employment, such as employer pension contributions. Using contractors can therefore give technology and media businesses control over a highly flexible pool of talent.
So far so good, but problems arise when HM Revenue & Customs (HMRC) decides that, based on the facts, a contractor is actually an employee of the business.
Regardless of any service contracts in place, HMRC will look at the reality of the relationship between the individual and the technology and media business. In doing so, a number of typical tests will be applied. HMRC will, for example, consider:
- How much of the individual’s working time is assigned to that firm and over what period?
- From where does the individual provide their services – the client’s office, or their own base?
- Who owns the laptop or PC the individual uses?
- Who carries the financial burden associated with any costs of providing the services?
Was the individual previously an employee of the firm?
Some cases are more straightforward than others. For example, if an individual was once employed by your technology and media business but is now doing the same work on a self-employed contractor basis, HMRC may well consider the individual to still an employee in reality. More often there will be grey areas requiring a degree of judgment as to the individual’s true status.
If a contractor is deemed to be an employee, they must be added to the firm’s payroll, with PAYE and NICs deducted from salary payments. Employers NICs must also be paid and HMRC will also seek payment of backdated PAYE and NICs from previous periods. Penalty charges could also arise.
Problems can arise when an individual’s personal tax affairs come under scrutiny, but HMRC also conducts PAYE reviews with technology and media businesses on a periodic basis. These will typically involve a review of PAYE systems and payments, and a review of purchase invoices. If there are numerous invoices from an individual contractor, or from a service company set up by a contractor, the facts behind those will be assessed.
Technology and media companies should always check the status of a contractor before beginning to use their services. If this has not been done, a review of all contractors should be undertaken. The financial risks of failing to do so could be substantial.
For more information or assistance in reviewing your contractors' status, please contact Mark Ayres